Pakistan government to divest 15% stake in oil and gas explorer

Scarcity of Pakistan paper should underpin demand for the GDS issue, which could raise up to $1.4 billion, but valuation may deter some.
The government of Pakistan will begin the sale of up to 15% of Oil and Gas Development (OGDC) to international and domestic investors this week, reducing its current 95% stake in the company, the countryÆs Privatisation Commission said yesterday.

Based on the share price in the domestic markets, the offer is expected to raise up to $1.4 billion for the government, bankers estimate.

The share price has come down slightly from a high of around PKR156 at the end of October to a level around PKR136, which should make PakistanÆs largest exploration and production company more attractive for international investors. At its highs, OGDC was valued at a premium to some of its key comparables like ThailandÆs PTT.

ôInvestors should be happy if the stock stays at these levels and they can pick up the new shares at a discount," says one source. However, the feedback during pre-marketing suggests that many investors arenÆt necessarily interested in OGDC as an oil company, but as a play on PakistanÆs rapid economic growth.

As such, the share sale offers ôa huge liquidity eventö for international investors, given that international share offerings out of Pakistan are still a rarity, the source notes. The interest from the international investment community in Pakistan was highlighted when MCB Bank attracted $700 million worth of demand for a $150 million GDR in mid-October. That deal, which was brought to market by Merrill Lynch, was the first international equity offering from the private sector in Pakistan in more than 10 years and saw MCB become the first Pakistani company to list in London.

The OGDC deal marks ôthe largest ever equity offering of a Pakistani company abroad, and is, of course, a very important part of our ongoing privatisation programme,ö minister for privatisation and investment, Zahid Hamid, was quoted as saying in the announcement.

ôThe offering will help raise further awareness amongst the international
investment community of the exciting investment opportunities that are
available in Pakistan today. It will also broaden OGDC's investor base,
enhance its international profile and expedite its transition into a truly
world-class, publicly-listed commercial enterprise,ö he added.

About 95% of the offer will go to institutional investors in Pakistan (in the form of ordinary shares) and to international investors through the sale of global depositary shares, making this the first time ever that domestic institutional investors will participate in an international bookbuilding for a Pakistan-listed company.

The remaining 5% has been earmarked for retail investors who will be able to buy the shares at a discount to the final institutional offer price.

The government will sell up to 645.139 million shares, of which a maximum 532.939 million shares will go to institutional investors in Pakistan and abroad. The GDSs that will make up the international portion each account for 10 ordinary shares and will be listed in London.

The 15% stake that is up for sale also includes an over-allotment option of up to 79.9 million shares.

Citigroup and Goldman Sachs are joint global co-coordinators and
bookrunners for the international offering, while BMA Capital is lead manager
and bookrunner for the domestic offering and joint lead manager of the international offering.

The price will be determined through a bookbuilding exercise that will start on Wednesday (November 15) and remain open until the end of trading in the local market on November 30. The shares are expected to start trading in London around December 6.

Contrary to many other countries, Pakistan doesnÆt limit the potential discount to the existing shares on secondary share offers, which means the final pricing is wide open at the moment. Sources say the bookrunners may set an indicative price range towards the end of the bookbuilding as a guide, although the final decision in that regard will depend on how much demand there is.

Analysts argue that among OGDCÆs key advantages are its gas dominant production and growth and the potential for new oil and gas finds, which will help it stand out in the current environment where oil prices have started to come back from their highs.

In a recent research report, Credit Suisse noted that seismic data collection has increased dramatically, and OGDC is set to step up exploration, targeting 120 wells, over the next three years. ôOGDCÆs acreage position supports its exploration aspirations û it has 39% of the licensed acreage - and, being the dominant government-owned company, it is positioned strongly for more,ö the report said.

"As the leading exploration and production company in Pakistan, our primary
objective is to enhance our production and reserve profile and, ultimately,
to maximise value for our shareholders,ö OGDCÆs chairman and CEO Arshad Nasar said. ôWe look forward to welcoming our new shareholders as we embark on our next phase of growth.ö

However, the Credit Suisse analysts added that the valuation (the share price was trading at PKR148.70 at the time) wasnÆt compelling despite above average volume growth and dividend yield and the companyÆs relatively low sensitivity to oil prices and they initiated coverage with an ôunderperformö rating and a 12-month target price of PKR140. Yesterday the stock closed at PKR136.50 on the Karachi Stock Exchange.

Political risk will be another factor to take into account, although in the past couple of years the political environment seems to have had, if anything, a slightly positive impact on the local stock market performance given the governmentÆs strong focus on improving the countryÆs finances and its keen support for further privatisations.

ôThere will definitely be people who will swerve this issue, but among the investors who are able to buy Pakistan paper there should be good interest,ö one observer says.
¬ Haymarket Media Limited. All rights reserved.
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